MGM Resorts International (MGM -1.09%) is a favorite for investors who want exposure to the lucrative gambling industry. The company is known for its iconic properties like the MGM Grand, the Bellagio, and the MGM Grand Cotai, which are located in the world's biggest gaming districts: Las Vegas and Macau.
This geographic diversification can be a boon in good times, but it has become a challenge during the coronavirus pandemic due to recent travel restrictions in southern China and Macau.
Shares are down around 50% year to date, significantly underperforming the S&P 500. However, MGM is poised for a comeback.
China has eased its travel restrictions on Macau, marking the beginning of the return of visitors to the gambling hub. On the U.S. side of things, the company will be a major contender in the fast-growing sports betting industry thanks to its strong brand.
1. China eases travel restrictions
China's Guangdong province has eased travel restrictions on visitors returning from Macau. This is an important development for the struggling gaming hub, thus boosting the fortunes of Macau-exposed casino operators like MGM Resorts as well.
Guangdong (the main point for mainland Chinese guests to Macau) previously required tourists returning from the city to undergo a mandatory 14-day quarantine upon reentry -- a restriction that sent Macau's gambling revenue down a staggering 97% to just $89.7 million in June.
As of July 15, authorities have lifted some of those restrictions for travelers who can provide a negative COVID-19 test within 24 hours before reentry into Guangdong.
Despite the good news, investors shouldn't expect Macau's gambling revenue to soar back to its previous levels anytime soon as China's tourism industry is still weak. But this latest move marks an inflection point -- the beginning of the recovery for Chinese gambling.
MGM CEO Bill Hornbuckle believes Macau will recover quickly once travel restrictions are loosened. And in the company's first-quarter earnings call, he highlighted plans to diversify revenue streams with non-gaming options such as hotel suites and room products in that region. MGM China had $800 million of liquidity at the end of April, providing a sizable cushion despite burning through $1.5 million of cash daily. MGM China CEO Grant Bowie was also optimistic, indicating MGM can do okay with lower traveler volume as the super-profitable premium market (high-rollers) should come back first. Bowie added, "The demand is there -- the opportunity for them to travel is the only thing they're looking for."
MGM earned around 23% of its fiscal 2019 revenue in China, so the region will be key to the company's performance going forward.
2. Sports betting is a promising growth driver
On the home front, MGM Resorts is pursuing a massive growth opportunity in legalized sports betting, an industry projected to expand at a compound annual rate of 8.8% through 2024. With many tourists still wary of visiting casinos during the pandemic, MGM has an opportunity to promote the adoption of its mobile gaming platforms as a safer way to gamble.
The company has partnered with U.K.-based gambling operator GVC Holdings to develop BetMGM, a mobile app that offers wagers on professional and collegiate sports as well as regular casino games. MGM has also partnered with Yahoo! Sports and Buffalo Wild Wings to help boost the popularity of its platform in states where such gambling is legal.
Most recently, BetMGM signed a multi-year deal with the Denver Broncos that will include the NFL's first in-stadium sports betting lounge. Partnerships like this will help introduce MGM's sports betting platform directly to dedicated sports fans.
However, MGM is not the only company looking to corner the lucrative sports betting industry. It will compete with fast-growing rivals like DraftKings, which is offering customers non-traditional betting options like esports and simulated leagues while major sports remain suspended due to the pandemic. With its first-quarter revenue jumping 30% to $89 million (and 60% pre-COVID), Draftkings demonstrates what's possible in the sports betting space.
As BetMGM expands into new states, the company is positioned to leverage its established brand and partnerships to claim market share in this $100 billion industry.
The company remains a world-class name in gambling and entertainment. With some patience, MGM stock is a good way for investors to bet on a recovery in the tourism industry while the cost of entry is still low.